Investment Firms

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1. New Software - Introducing the ATEB suitability letter generator
2. Are your suitability letters creating a lasting impression?
3. Treating Customers Fairly – How are things progressing?

4. Data Security – Understand the implications
5. Unfair contract terms
6. The ICOBS transitional period ends soon
7. FSA publish - 2008/09 Fees and Levies
8. FSA Themed Visit on Pension Transfers & SIPP – Are you ready?
9. Major failures – Mortgage Broker continues in business and FSA collect their fine
10. FSA attempting to address dual pricing issue in mortgage market
11. Examples of mortgage good practice

Ladies & Gentlemen

Please find enclosed the latest compliance and industry news.

As usual, sit back and enjoy!

Kind Regards

ateb consultants

Which article applies to me?
Please use the following table to decide which article applies to you, if any:

	1	2	3	4	5	6	7	8	9	10	11
Directors/Partners
Compliance / A&O Function
Money Laundering Officer
Advisers & Trainees
T&C Supervisor
Pensions Transfer Specialist
Back Office
Mortgage									M	M	M

1. New Software - Introducing the ATEB suitability generator

ATEB has partnered with *Intelledox of Australia to provide a unique solution to an industry problem, that utilises cutting edge intelligent international software to create unique and individual suitability letters every time.

*Intelledox is a leading document creation platform built on Microsoft technology, engineered to make complex data come together in documents swiftly and seamlessly, saving you time and money, ensuring consistency of content and minimising the risk of error.

Key benefits:

It is quicker and minimises the risk of error. The creation process can be delegated to sales support or para-planners, freeing up valuable adviser time. The document is created by following a systematic, step-by-step, creation wizard. There is no paragraph selection or cutting and pasting. The content is comprehensive and the document actually looks like a letter, not a collection of paragraphs. It is easy to read and allows for the entry of free text for personalisation.

The document is created in Microsoft Word, so you can still personalise the document further if required.

Here are some other good reasons:

• Generated letters are not technical, generic reports or short weak letters which really only confirm the “what”. Our system generates the “why”.

• As well as offering you plenty of opportunities to give positive reasons for the recommendation, the templates also prompt you to select and input ‘disadvantages’, an area often overlooked.

• Generic information is kept to a minimum.

• Because firms’ systems and styles differ the letters are designed to work alongside other documents and reports such a fund analyses or generic reports.

• These templates have been designed with the FSA theme of “Treating Customers Fairly” in mind. They are very specific and headings allow key areas to be the picked out. Short paragraphs and bullets are used where possible for ease of understanding.

• ATEB has used its compliance experience and 10 years of individual and general regulator feedback to focus on key and relevant content.

Ateb view:

There is no doubt that letter writing is a personal preference and, arguably, you will never find a system and style that suits all, but we feel that the combination of cutting edge technology, significant flexibility to personalise throughout and first hand compliance experience provides a perfect solution for many firms.

Action required by you:

Why not log on for a free 30 day trial at: http://www.atebsuitability.co.uk

To use ATEB suitability you must use a supported web browser and Microsoft Word.
	Min	Recommended
Microsoft Internet Explorer	6+	Version 7
Mozilla Firefox	2+	2
Microsoft word	97+	2003 - 2007

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2. Are your suitability letters creating a lasting impression?

‘Letters’ or ‘Reports’ debate

Just before we go any further, let’s just clear up the ‘Letters’ or ‘Reports’ debate.  Those of you who subscribe to regulation will recall that first we had ‘Back of the Fag Packet’, then ‘Reasons Why Letters’, then they became ‘Suitability Letters’ and now they are ‘Suitability Reports’. So you will no doubt be interested to know that in aligning their rules with recent European legislation client reporting terms, the FSA recently made changes and now refer to ‘Report’ rather than ‘Letter’ in their rules. However, the rules do not prevent firms from continuing to refer to ‘Letter’ if they wish. The FSA are quoted as saying “this change in terminology does not imply the need for greater detail or longer length” so ATEB feels it’s worth emphasising that in relation to ‘Reports’, size and length do not matter. For the purposes of this article we will refer to them as ‘Suitability Letters’.

A well written suitability letter is one of the most powerful tools

Anyway, I’m sure not many would argue when we say that a well written suitability letter is one of the most powerful tools in the sales process. It will confirm not only the current advice but, hopefully, pave the way for future sales and help create a loyal and longer term client.

We all seem to accept this principle, but ask yourself truthfully, how good are the suitability letters that you produce? Are they accurately constructed with loving care and attention or are they produced en masse from a rather impersonal production line?  What if we could have the best of both and produce accurate first time letters that are highly personalised …… well, you can with ‘ATEB Suitability’!

Without wanting to make you feel envious, we have had the opportunity to examine many Suitability Letters over the years as part of our audits and I thought you might be interested in some feedback with our views. Although some are slightly humorous, many are still prevalent, even today!

Are you guilty of any of the following?

Feedback	ATEB View
Letter referred to as a ‘regulatory requirement’.	Well I guess that it is, but it’s not something I would necessarily need to tell the client.
Photocopied parts.	Cheap skates … there is simply no excuse for this type of approach!
Standard confirmation lists used.	Oh dear… someone needs to have a quiet word.
Poor grammar	Diplomatically speaking we observe ….‘differing standards’. In our view, letters being issued with poor grammar is a fundamental error of judgment.
Too lengthy with no headings	You and I both know the clients will never read it!
No prominent summaries contained in reports.	Pure laziness!
Weighting of content – i.e. unnecessary overkill on say provider information	Pontificating is an art at which the insurance companies excel ….. I think brief points will suffice, thank you.

 

                                                  

Feedback	ATEB View
Inconsistent content i.e. risk referred to as ‘medium’ and ‘balanced’ and ‘middle of the road’ in the same letter.	Will raise lots of unwanted questions now and in years to come.
Too technical	Confusion is an interesting tactic to deploy and one that we would warn against. It is safe to assume that many of your clients do not know as much as you.
Letters not signed or dated	This may throw clients “off the scent” initially but later on it will come back to bite you in the proverbial ‘audit trail’.
Too general i.e. ‘Reason What’ letter	Complete waste of time. From experience of investigating complaints over the years, these letters offer little protection to the firm and are a breach of the suitability rules. They do not contain benefit statements ie a link to the soft facts (Clients wants and desires in their own words).
The words ‘I recommend’ are omitted	Unless you are in the business of “not giving advice” you should refer to the ‘reason why’ you recommend and not “here are your options  .. please pick one”
Printed onto letterhead and issued with “This is a Template” emblazoned in Arial Bold Size 14 font at the top of each page.	This really happened! We were deeply concerned over the health (in particular the eyesight) of the adviser responsible.

So what can we learn from the above?

• A good suitability letter is concise and easy to understand.

• It gives a reasoned explanation of the risks and a reasoned selection of product and product provider information.

• It explains the risks that are specific to the client's circumstances and the product.

• The letter repeats the main elements of the discussions that have taken place between the adviser and client.

We think our software will enable you to produce letters that tick all these boxes!

Ateb view:

If you have the view that “clients never read suitability letters” then it’s still worth bearing in mind that ambulance chasers, solicitors, grieving relatives and regulators do and they may all have a vested interest in one of your letters one day in the future. The moral of the story is simple: aim to produce creative and memorable Suitability Letters and create a lasting impression!

Action required by you:

Why not log on for a free 30 day trial at: http://www.atebsuitability.co.uk

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3. Treating Customers Fairly - How are things prgressing?

We have come up with some typical Q&As to help understand some of the FSAs’ expectations:

 

Q. Are your Management Information (MI) Systems in place?

A. They should be - March 2008 was the deadline.

Q. What type of MI is produced?

A. Typically, results of files checks, training, business spreads, complaints etc

 

Q. How often do your MI systems report information to you?

A. For small firms, monthly would be sensible

Q. Where do you discuss the MI?

A. Directors, Partners or compliance meeting would be a potential answer

Q. What does the MI tell you?

A. Should be able to highlight trends, both positive and where improvements can be made

Q. What do you do about the MI?

A. Analyse it and then document the action taken (or that no action is taken)

Q. What would be an example of action taken?

A. An instruction to gather more fact find information following a poor file check

Q. What would be an example of a trend?

A. Insufficient benefit statements being made within suitability letters (or Demands & Needs) for a period of, say, three months.

Q. If a trend was highlighted – what action could you take?

A. Could lead to a possible training need or requirement to improve the firm’s systems

Q. Are you doing suitability as well as material compliance (completeness) checks?

A. You should be - and these should be documented carefully

Q. Where do you document the above?
A.  An Individual file check feedback proforma, a tailored report and /or meeting note or similar.

Ateb view:

We predict many firms will be fined later this year and next year if they do not act swiftly and implement systems.

Action required by you:

Look for gaps in your process and talk to ATEB if you are still unsure.

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4. Data Security - Understand the implications

Recent editions of the newsletter have contained articles on data security, so let’s not lose the momentum. How many of you have since taken action in this area? - Not many I bet!

The safekeeping of customer data is a crucial responsibility for firms. The FSA have emphasised the importance of data security for several years, and they currently regard poor data security controls as a serious, widespread and high-impact financial crime risk. In particular, the FSA have identified data security as a key risk because financial services firms, by the nature of their business, generally hold lots of data about their customers. It is the FSA’s firm belief that consumers are entitled to rely on firms to ensure their personal information is secure.

Despite the Data Protection Act’s requirement for firms holding customer data to keep it secure, data is sometimes lost, either though error – such as when an employee loses a company laptop – or theft. Firms are vulnerable to both types of loss. Firms should note that the FSA support the Information Commissioner’s position that it is not appropriate for customer data to be taken offsite on laptops or other portable devices which are not encrypted. The FSA may take enforcement action if firms fail to encrypt customer data taken offsite.

The implications of data loss are very serious. It can lead to false credit applications, fraudulent insurance claims, fraudulent transactions on a victim’s account and even a complete account takeover. Identity fraudsters use sophisticated technology to make full use of the stolen data, both by creating false documents and by making fraudulent transactions. Please be aware that there is an expansive international market for stolen customer data, including data belonging to UK citizens. Sets of data are bought and sold freely in social settings such as pubs and clubs and subsequently traded through criminal networks that often operate on the internet.

Ateb view:

Firms’ responsibilities in this area form part of the ‘Treating Customers Fairly’ standards and are defined in the FSA Principles 2 and 3. Also relevant is FSA Rule SYSC 3.2.6R, which states that ‘a firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime’. It is likely that most small firms will need to make changes to bring their current systems up to the standards required. We would encourage those changes to be made sooner rather than later.

Action required by you:

Look at related articles in previous editions of the newsletter and put together a strategy for dealing with this growing area of importance. Create and develop the systems, and work them until they become habitual.

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5. Unfair contract terms

The fairness of Consumer Contract Terms is a fundamental factor in firms treating their customers fairly. Firms have a legal responsibility to ensure that the contracts they enter into with consumers contain fair and balanced terms. This obligation comes from the Unfair Terms in Consumer Contracts Regulations 1999 ('the Regulations') and forms part of a wider responsibility to treat customers fairly.

Having unfair terms in consumer contracts may provide evidence that firms are not treating customers fairly. This is particularly relevant with the December 2008 Treating Customers Fairly deadline rapidly approaching.

The FSA have recently carried out a project to see how firms have responded to their obligation to ensure that their consumer contract terms are fair and over half of the sample contracts reviewed contained at least one variation term which was, in the FSA’s view, drafted unfairly.

Ateb view:

We believe that smaller firms should be proactive in reviewing their contract terms for fairness. Being fair is all about being clear and getting the right balance between your rights and the rights of your customer.

Action required by you:

We suggest that you review your contracts from time to time to ensure that the terms they contain are balanced and written in a fair way. For further information about the Regulations please see Unfair contract terms - FAQs. http://www.fsa.gov.uk/Pages/Doing/Regulated/consumer/faqs/index.shtml Please see the link below for an example of how the FSA have applied the Regulations to a smaller firm: http://www.fsa.gov.uk/pubs/other/undertaking_hayburnrock.pdf

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6. The ICOBS transitional period ends soon

Reminder: The new ICOBS full replace ICOB on 6 July 2008.

The new Insurance Conduct of Business sourcebook (ICOBS) was published on the 6 January 2008. They focus on the high level outcome of protecting consumers, and less on specific and detailed rules.

Ateb view:

Although, this will mean more flexibility for firms, the FSA will require that the same high standards of conduct remain.

Action required by you:

All firms selling general insurance products will need to understand and comply with the new requirements in order to ensure they are treating their customers fairly.

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7. FSA publish - 2008/09 Fees and Levies

The FSA fees for 2008/09 were recently published in the annual Policy Statement, on the FSA fees web pages.

The fees and levies invoices for 2008/09 will be issued in June/July.

The instalments plan introduced in 2005 and facilitated by Premium Credit Limited (PCL) has been renegotiated for 2008/09.

Ateb view:

In the interests of fairness and transparency - I wonder if the FSA are paid a commission from Premium Credit Limited and, if they are, whether they rebate or retain it – Answers on a post card!

Action required by you:

Firms wishing to utilise the credit facility again need to re-apply to PCL using the form enclosed with the invoice.

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8. FSA Themed Visit on Pension Transfers & SIPP - Are you ready?

Request for Information

An ATEB client received one of these recently. The visit consisted of a combination of file reviews of advised transfers into PPPs and SIPPs from occupational schemes and PPPs, and interviews with appropriate employees. The FSA requested the following information for the period from April 2006. The firm was given 10 days to complete and return to the FSA.

• Spreadsheets containing information on transfers (part of new business book)
• Current organisation chart (key individuals and reporting lines)
• Confirmation of paper or electronic files and location
• Personal pension & SIPP transfer advice procedures & adviser guidance
• Terms of Business & Menu
• Compliance monitoring procedure for personal pension & SIPP transfer advice
• Results of any compliance reviews undertaken on pension transfer advice
• A copy of the MI collected on personal pension & SIPP business
• KPI - Sales by provider and product type
• Firm’s attitude to risk assessment form

 

Questions asked during Interview

• What key pieces of information you would gather in fact find process?
• What type of customer is suitable for a transfer?
• What type of person would you advise not to transfer?
• What is your business strategy in relation to pension transfers?
• Asked about how new business is obtained
• How do you explain that SHP is not suitable?
• How do you insure you have control over transfers?
• From checks what sort of MI do you receive?
• Do you meet formally to discuss issues?
• Give me an example of something that has been flagged and action taken?
• What training needs have you identified?
• How often do you use a FF?
• Do you use an Attitude to Risk checklist or similar?
• Do you compare ceding schemes for comparison
• How do you deal with commission bias?
• How do you satisfy yourself that you have picked the best product for that client?
• What is the situation with offering ongoing advice once you have given initial advice?
• Who initiates the contact for a review?

Feedback

The FSA explained that because the firm had not completed an analysis /comparison of the ceding and receiving schemes or recorded sufficient Know Your Customer information it was difficult for them to make a judgment on whether the advice was suitable. It is likely therefore that the firm will receive another visit once all the results of the project are compiled. It is also probable that this could lead to a fine and some unwanted publicity. The firm had also failed to act on MI and correct the problem.

Ateb view:

The FSA are sharpening their knives.  We have said before on many occasions “there is nothing like an FSA visit to focus the mind” the question remains though – will your focus be too late?

Action required by you:

Make improvements quickly if you feel you are falling short.

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9. Major failures - Mortgage Broker continues in business and FSA collect their fine

Recently, the Financial Services Authority (FSA) has fined a mortgage broker £10,500 for failures in the sales process used for self certification mortgages. The story has a happy ending in that the firm will be allowed to continue trading having paid the FSA handsomely for their diligence.

So what did this firm do wrong?

• They relied too heavily on customers’ declarations that they could afford the mortgage contracts
• They did not assess the affordability of recommended mortgage contracts
• There were inadequate procedures to counter the risk of his business being used by customers to commit mortgage fraud.
• The firm could not demonstrate they had conducted training
• Supervision and monitoring of advisory staff was inadequate  
• They failed to disclose the additional packager fees

Customers had made false declarations and the firm simply accepted this information at face value.

Ateb view:

Once again, we reiterate that asking customers to sign a declaration does not absolve brokers from taking steps to assess and record whether the recommended contracts are affordable and suitable.

Action required by you:

Check your procedures are robust enough.

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10. FSA attempting to address dual pricing issue in mortgage market

Jonathan Fischel, Head of Supervision of small mortgage intermediaries, spoke recently at the Mortgage Expo. The following is based on that speech.

Background

A recent development in the mortgage market has been lenders either withdrawing from the intermediary market completely or the introduction of dual pricing where some lenders now offer better priced products for direct business.  How lenders choose to price and distribute their products is a commercial matter and, they are not in breach of FSA rules if they choose to go down this route. 

The FSA are aware that some brokers would like to be able to make recommendations on products that are not available to them but that the requirement to provide the customer with a KFI has prevented them from doing so because most sourcing systems do not have details of direct products.

The FSA have therefore been working with AMI and their policy team on two key issues arising which have needed further clarification.

• Obtaining and content of the KFI (For direct cases)
• Responsibilities of a whole of market intermediary.

Obtaining and content of the KFI

The FSA’s view is that, where the case is ‘direct’ the broker fee would not need to be included in the lender produced KFI/offer. 

FSA quote: “It so happens that the customer has paid that fee as part of their route to the product, but it is not a necessary condition for the credit.  Therefore, the adviser fee does not need to be included in the APR or section 8 of the KFI produced by the lender”

The customer is therefore going to be receiving two KFIs in these circumstances: one from the adviser and one from the lender.  As well as showing differences in fees, there may also be a difference in section 2, as the lender may be selling the product on a non-advised basis.  The broker should manage any confusion by explaining the different roles the firms are playing and the resulting differences in the disclosures they will provide. 

Responsibilities of a whole of market intermediary

The second issue arising from dual pricing is the FSA expectations on whole of market intermediaries under current conditions.  The FSA think that the intermediary should clarify to their customer that, while they are not tied to a particular set of providers, there are certain deals only available direct from lenders; and that if they want to investigate that sector of the market for themselves they may find more competitive products, although the FSA don't expect the intermediary to point to a specific product or provider.

Ateb view:

Vital reading if you are involved in this market as he goes on to discuss risks and TCF.

Action required by you:

You can find the  speech at: http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2008/0515_jf.shtml

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11. Examples of mortgage good practice

The FSA have compiled lots of useful information following their mortgage research and numerous visits to firms. Areas include:

• Appointed representatives
• Subprime mortgages
• Lifetime mortgages
• Mortgage quality of advice processes
• Mortgage firms working with packagers
• 'Higher risk' firms
• Training and competence
• Self-certification mortgages
• Equity release
• Financial promotions

Ateb view:

A must for all firm principals and compliance officers!

Action required by you:

You should read the feedback relevant to your firm and consider how you can use it within your business. Information is located at: http://www.fsa.gov.uk/Pages/Doing/small_firms/mortgage/practice/index.shtml

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Important Note:

The ATEB Newsletter is intended to provide general guidance on areas of compliance and T&C; however it is not a replacement for the main Rules and Guidance contained within the FSA Handbook. We welcome all feedback. If you have any feedback or questions relating to any articles then please direct them to your local ATEB consultant or the newsletter editor Steve Bailey email steve@atebconsulting.co.uk Unless you have consulted specifically (as part of a regular visit) with ATEB on a particular issue then ATEB Consulting accept no liability for any actions taken based on the information contained solely within the newsletter.

Contact Us:

Ateb Consulting
The Old Post House
29 Nedderton Village
Northumberland
NE22 6AX

T: (01670) 822984
M: (07703) 576951
E: steve@atebconsulting.co.uk
W: www.atebconsulting.co.uk